Venture Funds Appear To Be Writing Off 2009


Many venture firms appear ready to write off 2009 as a lost year.

It is no surprise. Exit markets are tough (though a few IPOs have launched), product markets are soft and investors have little money to pony up for new funds.
The fundraising diet may lead to a smaller industry as firms disappear

General partners may indeed have little choice than to retrench and plan for a time when the economy looks better. And hording money may be the best alternative with the industry likely to shrink in coming years.

This pent-up desire to sit still was evident in venture-capital fundraising statistics released Monday by the National Venture Capital Association and Thomson Reuters.

According to the researchers, only 25 venture firms raised funds in the second quarter – the smallest number since 1996. The money they raised ($1.7 billion) was the lowest amount collected in a quarter since 2003.

Welcome to the 21st Century paradox, where the past is becoming the future.

So far this year, VCs have raised just $6.3 billion for their funds. If that pace continues, the year will come in at less than half the $28.4 billion of 2008 and about a third of the $36 billion of 2007.

Clearly the industry is preparing for a future that might hark back to the pre dot-com bubble days. Already some pundits are projecting that half of all venture firms need to disappear to open up enough opportunities for the rest.

The “shrink to survive” message is now being echoed by industry luminaries. “We believe that many venture firms are waiting until 2010 and beyond to go out to their limited partners, who, in an improved market, will look more favorably upon the assets class, vis-à-vis other alternatives,” says Mark Heesen, president of the NVCA. “That said, there will be firms that will not be able to raise a follow-on fund, and our industry is positioned to contract over the next five years through this type of attrition.”

Yet the belief in contraction is not unanimous. Interesting to note is that while fund raising fell to a 13-year low in the second quarter, new funds drew strong interest. There were eight of them, or roughly a 2-to-1 ratio to existing funds.

That ratio was 15 to 1 in the first quarter. It reminds me of the old Dickensian description: they were the best and the worst of times.